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Saturday, 25 September 2010

Steve Landsburg & the double tax on savings fallacy-

Steve Landsburg- a very bright mathematician- is getting things wrong on his blog about double taxation of savings.

'A tax on wages is (among other things) a tax on capital gains, because your capital gains are proportional to your savings and a tax on wages reduces your savings. Capital gains, therefore, are taxed in advance at exactly the same rate as earned income. The capital gains tax (along with any other tax on capital income) sits on top of that. And it’s only the total that matters.'

Suppose I get a job as a Prof of Econ, or a janitor. As a result of being a Prof. , or janitor, I'm offered a second job- as a consultant to Rightwingnutjobs'r'us. Clearly, it is because of my being a Prof., or having damaged my brain by breathing in the fumes of powerful cleaning fluids, that I'm getting the gig as a consultant and you can hardly call it work- I mean, all I have to do is shoot my mouth off which I'd do for free anyway.

So like IT IS A TOTAL DOUBLE TAXATION if my douceur from Rightwingnutjobs'r'us is like taxed as income dude. I mean, like I dun already paid taxes on my salary as a Professor or janitor- and it is only because of the brain damage I sustained or induced in that role that I got this bonus from Rightwingnutjobs'r'us.

Indeed, because my job as a Prof is only possible because I got an education- which Daddy paid for out of his post-tax income- so taxing my professorial or janitor's (the janitor studied Post Colonial Theory) salary is like DOUBLE TAXATION dude.

Prof. Landsburg is using precisley this argument against a tax on interest income

Notice (apart from seigniorage) there is no tax on cash under your mattress. The moment you invest it however there is a new economic activity. That this activity continues to occur while you're sitting on the toilet- on the analogy of a Professor of Econ, or janitor, fouling the air by giving vent to her views on behalf of Rightwingnutjobs-r-us- is why it is taxed, just as payments made for services rendered by that august institution last mentioned are also taxed.

The Govt. may or may not be providing institutional and legal support for the existence and functioning of markets and corporations. Nevertheless, it is entitled to tax any economic activity which becomes measurable and fungible to a greater or lesser extent by reason of occurring through the market.

Here is the good Profs ludicrous Indifference curve analysis to support his view.

Imagine 2 tax regimes

A. 50 % income tax

B 40% tax on both income and interest

However, constrain the above such that Govt. receives equal revenue by adjusting tax rate.

What happens? Well, if you try to escape tax on interest by just not saving and spending all you have the Govt. simply raises the tax rate AT THAT VERY TIME PERIOD to 50%. In other words the real situation the Prof is describing is

A- a Tax on income of 50%

B- a Tax on income of 50% plus a tax on interest of 50%

Of course, if interest rate is non zero- in other words if some economic activity occurs as a result of savings- then A is always better than B.